TOPIC 2: INVENTORY MANAGEMENT

Meaning of Inventory
Inventory generally refers to the materials in stock. It is also called the idle resource
of an enterprise. Inventories represent those items which are either stocked for sale
or they are in the process of manufacturing or they are in the form of materials,
which are yet to be utilised. The interval between receiving the purchased parts and
transforming them into final products varies from industries to industries depending
upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of
various kinds to act as a buffer between supply and demand for efficient operation of
the system. Thus, an effective control on inventory is a must for smooth and efficient
running of the production cycle with least interruptions.

Reasons for Keeping Inventories

1. To stabilise production: The demand for an item fluctuates because of the number
of factors, e.g., seasonality, production schedule etc. The inventories (raw materials
and components) should be made available to the production as per the demand
failing which results in stock out and the production stoppage takes place for want of
materials. Hence, the inventory is kept to take care of this fluctuation so that the
production is smooth.

2. To take advantage of price discounts: Usually the manufacturers offer discount

for bulk buying and to gain this price advantage the materials are bought in bulk even
though it is not required immediately. Thus, inventory is maintained to gain economy
in purchasing.

3. To meet the demand during the replenishment period: The lead time for
procurement of materials depends upon many factors like location of the source,
demand supply condition, etc. So inventory is maintained to meet the demand during
the procurement (replenishment) period.

4. To prevent loss of orders (sales): In this competitive scenario, one has to meet
the delivery schedules at 100 per cent service level, means they cannot afford to miss
the delivery schedule which may result in loss of sales. To avoid the organizations
have to maintain inventory.

5. To keep pace with changing market conditions: The organizations have to

anticipate the changing market sentiments and they have to stock materials in
anticipation of non-availability of materials or sudden increase in prices.

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6. Sometimes the organizations have to stock materials due to other reasons like
suppliers minimum quantity condition, seasonal availability of materials or sudden
increase in prices.

Objectives of Inventory Control

1. To ensure adequate supply of products to customer and avoid shortages as far as

possible.
2. To make sure that the financial investment in inventories is minimum (i.e., to see
that the working capital is blocked to the minimum possible extent).
3. Efficient purchasing, storing, consumption and accounting for materials is an
important objective.
4. To maintain timely record of inventories of all the items and to maintain the stock
within the desired limits.
5. To ensure timely action for replenishment.
6. To provide a reserve stock for variations in lead times of delivery of materials.
7. To provide a scientific base for both short-term and long-term planning of
materials.

Benefits of Inventory Control

It is an established fact that through the practice of scientific inventory control,

following are the benefits of inventory control:
1. Improvement in customer’s relationship because of the timely delivery of goods
and service.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilization of working capital. Helps in minimizing loss due to
deterioration, obsolescence damage and pilferage.
4. Economy in purchasing.
5. Eliminates the possibility of duplicate ordering.

Inventory control methods:

There are two basic approaches on which inventory; control systems both manual and
automatic are based. These are: the action level method and the periodic review approach.

1) The action level method (Fixed order quantity): The action level method of
controlling inventory is way of fixing each commodity and stock levels that are
recorded in the stock control system and subsequently used as a means of indicating

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 when some action is necessary. There are various kinds of stock levels, but the
fundamental controls are: ordering, hastening and maximum levels. In order to keep
abreast with the changing conditions after stock level have been established, they
should be carefully reviewed at suitable intervals e.g. quarterly, monthly or weekly
and should be adjusted to meet any changes as circumstances may require.

Advantages of fixed order point:

 On average, stocks are lower than with the periodic system
 Economic order quantity are applicable
 Enhanced responsiveness to demand fluctuations
 Appropriate for widely differing inventory categories
 Replenishment orders are automatically generated at the appropriate time by
comparison of actual stock levels against re order levels

Disadvantages of fixed order point:

 The re-ordering system may become overloaded if many items of inventory reach
re-order level at the same time
 Leads to random re-ordering pattern thus increasing ordering costs

2) The periodic review system: In this system an item’s inventory position is reviewed
periodically rather than at a fixed order point. The periods or intervals at which stock levels
are reviewed will depend on the importance of the stock item and the costs of holding that
item. A variable quantity will be ordered at each review to bring the stock level back to
maximum. Maximum stock can be determined by adding one review period to the lead time,
multiplying the sum by the average rate of usage and adding any safety stock. This can be
expressed as:

M-W (T+L) +S
Where: M= Pre-determined stock level
W= Average rate of stock usage
T= Review periods
L= Lead time
S= safety stock

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 Advantages of periodic review system:
 Greater chance of elimination of obsolete items owing to periodic review of stock
 The purchasing load may be spread with possible economies in placing orders
 Large quantity discounts may be negotiated
 Production economies due to more efficient production planning and lower set-up
costs may result from orders always being in the same sequence

Disadvantages of periodic review system:

 On average, larger stocks are required than with fixed order point system
 Re-order quantities are not based on economic order quantities (EOQ).
 If the usage rate changes shortly after a review period, a stock-out may occur
before the next review date
 Difficulties in determining appropriate review period unless demands are
reasonably consistent.

3) Material requirement planning (MRP1): This is a product- oriented computerized

technique aimed at minimizing inventory and maintaining delivery schedules. It relates
the dependent requirements for the materials and components comprising an end product
to time periods known as ‘buckets’ over a planned horizon (typically of one year) on the
basis of forecasts provided by marketing and sales and other input information.

While having elements common to all inventory situations, MRP 1 is most applicable
where:
 The demand for items is dependent
 The demand is discontinuous that is ‘Lumpy’ and non-uniform
 In the job, batch and assembly or flow production or where all manufacturing methods
are used

The aims of material requirement planning:

 To synchronize ordering and delivery of materials and components with production
requirements
 To achieve planned and controlled inventories and ensure that required items are
available at the time of usage or not much earlier
 To promote planning between the purchaser and the supplier to the advantage of each

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 To enable rapid action to be taken to overcome material or component shortages due to
emergencies, late deliveries etc

4) Material resource planning (MRP 11): This is concerned with virtually any resource
entering into production including manpower, machines and money in addition to
materials. MRP 11 is an expanded system of MRP 1 which has to new capabilities that are
first, financial interface which provides the ability to convert operating production plans
into financial terms so that the data can be used for financial planning and control
purposes of a more general management nature, then secondly provision of a simulation
of capability that makes it possible for management to do more extensive alternative
planning work in developing the marketing and the business plans. MRP 11 is concerned to
be more comprehensive when compared with MRP 1 and many users MRP 11 as the
umbrella system while MRP 1 as the major component of MRP 11.

5) Distribution requirements planning (DRP): This is an inventory control and scheduling

technique that applies MRP principles to distribution inventories. It may also be regarded
as a method of handling stock replenishment in a multi-echelon environment. An echelon
is defined by chambers dictionary as: a stepwise arrangement of troops, ships, planes etc.
Applied to distribution the term multi-echelon means that instead of independent control
of the same item at different distribution points using EOQ formulae, the dependent
demand at higher echelon (e.g. a central warehouse) is derived from the requirements of
lower echelons e.g. regional and local distributions and purely merchandizing
organizations e.g. supermarkets.

6) Just-in-time system: This is an inventory control philosophy whose goal is to

maintain just enough material in just the right place at just the right time to make
just the right amount of product. For JIT to work two things must be happening that
are: (a) all parts must arrive where they are needed, when they are needed and in
the exact quantity needed (b) all parts that arrive must be usable parts. In achieving
these requirements, purchasing has the following responsibilities:
 Liaison with the design function
 Liaison with suppliers
 Investigating of the potential suppliers within reasonable proximity of the purchaser to
increase certainty of delivery and reduction of lead time.

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 Establishing strong, long-term relationships with suppliers in a mutual effort to reduce
costs and share savings
 Establishment of an effective supplier certification programme which ensures that quality
specifications are met before components leave the supplier so that receiving inspections
are eliminated.
 Evaluation of supplier performance and the solving of difficulties as an exercise in
cooperation.

Benefits of Just-in-time:
(a) Quality- fast detection and correction of unsatisfactory quality and ultimately higher
quality in purchased parts
(b) Design- fast response to engineering change requirements
(c) Productivity- reduced rework, reduced inspection, reduced parts related delays
(d) Capital requirements- reduced inventories of purchased parts, raw materials, work in
progress and finished goods
(e) Part costs- low scrap costs; low inventory carrying costs
(f) Administrative efficiency: fewer suppliers, minimal expending and order release work;
simplified communications and receiving activities.

7) ABC analysis: This is application to stock holding. ABC analysis shows that the high
inventory is normally represented by relative few items and vice versa. While the
percentage varies between organisations setup, the following
presentation shows a proportion of how inventory is segmented:

Category (Usage) Approximate % of inventory Approximate %

of usage value
A-High value 10% 60%
B-Moderate value 30% 30%
C-Low value 60% 10%

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 Category A: These are items which are small in number and high in value. They are
essential to the operation of the production such that the absence of such materials
can result to breakdown of production.
Category B: They are medium in number and have medium usage value.
Category C: They are high in number and low in usage value. The absence of such
items in the short-time cannot affect the performance of the company.
Conducting the ABC analysis:
It involves the following steps:
(i) Calculate the annual usage value of each stock item
(ii) Rank the items in descending order of usage value i.e. from the most
valuable to the least
(iii) Prepare sub-totals of each usage value beginning with the biggest

(iv) Plot a pareto curve

(v) Insert the ABC break points

The ABC curve:

100

80 C
% of B
usage
Value A
0 20 50 100
% of items

8) Enterprise resource planning (ERP): This is a business management system that is

supported by multi-module application software that integrates all the department’s
functions of an enterprise. It is the latest and possibly the most significant development
of MRP 1 and MRP 11. While MRP allows the manufacturers to track supplies, work in
progress and the output of finished goods to meet sales orders, ERP is applicable to all
organisations and allows managers from all functions or departments to have a
consolidated view of what is or is not taking place throughout the enterprise. Most ERP
systems are designed around a number of modules each of which can be stand-alone or
can be combined with others.

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Advantages of Enterprise resource planning:
 Faster inventory turn-over-manufacturers and distributors may increase inventory
turns by tenfold and reduce inventory cost by 10 % to 40 %
 Improved customer service: In many cases an ERP system increase fill rates to 80 % or
90 % by providing the right product in the right place at the right time thus increasing
customer satisfaction
 Better inventory accuracy, fewer audits: An ERP system can increase inventory
accuracy to more than 90 % while reducing the need for fewer physical inventory
audits
 Reduced set up times: ERP can reduce set up time by 25 % to 80 % by grouping similar
production jobs together with the efficient use of equipment and minimizing down
time through efficient maintenance
 Higher quality work: ERP software with a strong manufacturing component proactively
pin points quality issues providing the information required to increase production
efficiency and reduce or eliminate re-work
 Timely revenue collection and improved cash flow: ERP gives manufacturers the
power to proactively examine accounts receivable before problems occur instead of
just reacting. This improves cash-flow.

Disadvantages of enterprise resource planning:

 ERP implementation is difficult:
This is because implementation involves a fundamental change from a functional
to a process approach to business
 ERP systems are expensive:
This is especially so when the customization of standard modules to accommodate
different business process is involved
 Cost of training employees to use ERP can be high
 There may be a number of un intended consequences such as employees stress and
resistance to change and the sharing of information that was closely guarded by
departments or functions
 ERP systems tend to focus on operational decisions and have relatively weak
analytical capabilities

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 TOPIC 3: TRANSPORTATION

Refers to the activity that facilitates physical movement of goods as well as individuals from
one place to another. In business it supports trade and industry in carrying raw materials to
the place of production and distributing finished products for consumption. Individuals or
business firms that engage Business Studies themselves in such activities are called
transporters. Generally, transporters carry raw material, finished products, passengers, etc.
from one place to another. So it removes the distance barrier. Now-a-days goods produced at
one place are readily available at distant places. People move freely throughout the world
because of transport. It is associated with every step of our life. Without transport, we, as
well as business units cannot move a single step.

Modes of transportation:
a) Road transport
b) Rail transport
c) Air transport
d) Deep sea transport
e) Pipelines

 Service capability of each mode-road, rail, water, air and pipeline:

1) Road transport: It incorporates transport using road bound means like Lorries, trucks,
Vans, tankers etc. It is suitable for transporting durable, bulk products, door-to-door
deliveries especially where the distances covered are not long. Categories of road
transport include:
a) Own fleet e.g. company lorries, Vans etc
b) Contract/hire e.g. Swan carriers, Andy forwarders etc.
c) Public hauliers e.g. Signon freight

Advantages of road transport:

 It provides door-to-door service
 Its relative cheap compared with other modes of transport.
 Its relatively faster
 Its very flexible.
 Its not limited to geographical features like mountains, valleys, rivers except large
water bodies.
 Its easily and greatly available

Disadvantages of road transport:

 Its relatively slower than air and pipeline transport
 There are more delays due to traffic jams
 Its unsuitable for long distances

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  Not suitable for urgently required goods and perishables unless special facilities are
installed
 Unreliable since road transporters don’t stick to strict time schedules
 They are more prone to accidents, theft and pilferage of goods.

2) Rail transport: Its one of the oldest modes of transport and its popularity was fuelled by
the industrial revolution. The first trains were steam powered which were later replaced
by diesel powered and more recently electric trains were introduced. Rail transport is
suitable for bulky and durable goods to be transported over long distances, heavy/less
value consignment like sand, gravel, cement, grains etc.

Advantages of rail transport:

 Its one of the cheapest modes of transport
 Its suitable for long distances hauls
 Special wagons (Boogies) can be provided for special cargo e.g. refrigerated wagons
for perishables etc
 Its reliable due to adherence of strict schedules
 It has a large capacity for transporting loads of related cargo
 Its suitable for transporting bulky and irregular goods e.g. tractors
 No major limitation on geographical areas

Disadvantages of rail transport:

 Its a slow means of transport
 Rail network is limited to few urban centres
 It involves heavy capital investment to construct and maintain
 Its unsuitable for perishable and urgently required cargo
 It requires specialized skills to operate

3) Water transport (i.e. sea, navigable rivers, canal, lakes etc):

It encompasses the use of ships, barges, steamers, ocean liners, tankers cruisers, ferries,
canoes and boats. Its suitable over long distances, bulky and irregular shaped goods, for the
transportation of durables and for low value but large cargo.

Advantages of water transport:

 Reliable due to adherence of strict schedules
 It has the largest capacity to transport any quantities
 It has a global reach since no coastline in all the continents is inaccessible.
 It has relatively low cost of transportation
 Its flexible i.e. the same vessel can carry variety of items

Disadvantages of water transport:

It’s the slowest means of transportation
There are higher labour since its labour intensive

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 There are higher risks for total loss for cargo and goods incase of accident
Its suitable for perishable and urgently required goods
Its limited to only navigable area/water bodies

4) Air transport: It comprises air bound means of transportation like aeroplane and
helicopters. It’s the fastest means of transport and therefore its suitable for urgently
required light, perishable or highly valuable cargo. Air freight is commonly used in
exportation business and plays significant part in international commerce.

Advantages of air transport:

Reliable due to strict time schedules
It provides the fastest link possible hence offsetting(cancel) the added cost
It has wide reach and global presence/appeal
Guarantee of safety and security of cargo is generally higher
Its suitable for emergency supply like drugs, rescue efforts, humanitarian deliveries,
emergencies etc

Disadvantages of air transport:

Its the most expensive mode of transport
There are higher risk of total loss of cargo incase of accident
It has limited capacity
Its unsuitable for flammable, explosive and bulky products

5) Pipeline transport: It comprises underground transportation of liquid and gaseous cargo in

pipes. The revolution of pipeline has made it very convenient and easy to transport oil,
water and milk in some countries at minimum cost.

Advantages of pipeline transport:

Limited interference from geographical features
There are no delays in transporting cargo except incases of break downs
It offers flexibility because its possible to switch from one fluid to another
Its cheaper than air and road transport
Its suitable for long distance haulage
There is more security of cargo
Its less labour intensive

Disadvantages of pipeline transport:

 There is a huge capital outlay required
 It has limited transportation i.e. only liquid and Gas
 Its unsuitable for perishable liquids
 Its subject to sabotage hence risk to cargo

Minimising total distribution cost:

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(a) Use the appropriate mode of transport which is relatively cheap.
(b) Efficient utilization of vehicles. Avoid if possible empty vehicles on return journeys.
(c) Always source the right materials to avoid goods rejection.
(d) Arrange delivery times when suppliers are not busy other than peak periods which may
necessitate idle or waiting times.
(e) Negotiate lower rates either directly or through freight forwarders.
(f) Sitting manufacturing and assembly processes nearer to customers and suppliers.
(g) Undertaking a cost analysis of total costs to ascertain where possible economies of scale
may be made.

Intermodal transportation Concerns a variety of modes used in combination so that

the respective advantages of each mode are better exploited. Although intermodal
transportation applies for passenger movements, such as the usage of the different,
but interconnected modes of a public transit system, it is over freight transportation
that the most significant impacts have been observed

Container systems
Container systems can be viewed as a specialized mode of freight transport, although
the container is now a fundamental feature of all the major national and international
transport modes - road, rail, sea and air. Containerization makes possible the
development of what is known as the 'intermodal' system of freight transport,
enabling the uncomplicated movement of goods in bulk from one transport mode to
another. The main attributes of containers and container systems are as follows:
• They enable a number of small packages to be consolidated into large single unit
loads.
• There is a reduction in the handling of goods, as they are distributed from their
point of origin to their point of destination.
• There is a reduction in individual packaging requirements, depending on the load
within the container.
• There is a reduction in damage to products caused by other cargo.
• Insurance charges are lower due to the reduced damage potential.
• Handling costs at the docks and at other modal interfaces are reduced.
• There is a quicker turnaround for all the types of transport used. Port utilization
also improves.

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• The all-round delivery time is speedier, and so raises service levels.
• Documentation is simpler.
• The concept of 'through transit' becomes feasible, and allows for a truly integrated
transport system to be developed.
• In the early days of containerization, the systems that were developed tended not
to be well integrated across the different transport modes. This has considerably
improved in recent years.
• There is a need for special facilities and handling equipment, and these are very
costly. Thus, there are a limited number of transfer points available.
• The initial cost of the containers themselves is very high.
• The return of empty containers can often be an expensive problem. Trade is seldom
evenly balanced, so return loads may not be available.
• Containers may leak, thereby causing damage due to rain or sea water.
• Loads may be affected by their position of stow, eg above or below deck.

TOPIC 5: WAREHOUSING

We need different types of goods in our day-to-day life. We may buy some of these
items in bulk and store them in our house. Similarly, businessmen also need a variety
of goods for their use. Some of them may not be available all the time. But, they

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need those items throughout the year without any break. Take the example of a sugar
factory.
It needs sugarcane as raw material for production of sugar. You know that sugarcane
is produced during a particular period of the year. Since sugar production takes place
throughout the year, there is a need to supply sugarcane continuously. But how is it
possible? Here storage of sugarcane in sufficient quantity is required. Again, after
production of sugar it requires some time for sale or distribution. Thus, the need for
storage arises both for raw material as well as finished products. Storage involves
proper arrangement for preserving goods from the time of their production or
purchase till the actual use. When this storage is done on a large scale and in a
specified manner it is called ‘warehousing’. The place where goods are kept is called
‘warehouse’. The person in-charge of warehouse is called ‘warehouse-keeper’.

Warehousing refers to the activities involving storage of goods on a large-scale in a

systematic and orderly manner and making them available conveniently when needed.
In other words, warehousing means holding or preserving goods in huge quantities
from the time of their purchase or production till their actual use or sale.
Warehousing is one of the important auxiliaries to trade. It creates time utility by
bridging the time gap between production and consumption of goods.

Need for Warehousing

Warehousing is necessary due to the following reasons.
(i) Seasonal Production- You know that agricultural commodities are harvested during
certain seasons, but their consumption or use takes place throughout the year.
Therefore, there is a need for proper storage or warehousing for these commodities,
from where they can be supplied as and when required.
(ii) Seasonal Demand- There are certain goods, which are demanded seasonally, like
woolen garments in winters or umbrellas in the rainy season. The production of these
goods takes place throughout the year to meet the seasonal demand. So there is a
need to store these goods in a warehouse to make them available at the time of need.
(iii) Large-scale Production - In case of manufactured goods, now-a-days production
takes place to meet the existing as well as future demand of the products.
Manufacturers also produce goods in huge quantity to enjoy the benefits of large-
scale production, which is more economical. So the finished products, which are
produced on a large scale, need to be stored properly till they are cleared by sales.
(iv) Quick Supply - Both industrial as well as agricultural goods are produced at some
specific places but consumed throughout the country. Therefore, it is essential to
stock these goods near the place of consumption, so that without making any delay
these goods are made available to the consumers at the time of their need.

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(V) Continuous Production- Continuous production of goods in factories requires
adequate supply of raw materials. So there is a need to keep sufficient quantity of
stock of raw material in the warehouse to ensure continuous production.
(vi) Price Stabilization- To maintain a reasonable level of the price of the goods in
the market there is a need to keep sufficient stock in the warehouses. Scarcity in
supply of goods may increase their price in the market. Again, excess production and
supply may also lead to fall in prices of the product by maintaining a balance of
supply of goods, warehousing leads to price stabilization.

Functions of the Warehouse

1. Receiving-This includes the physical unloading of incoming transport, checking,
recording of receipts, and deciding where the received goods are to be put away in
the warehouse. It can also include such activities as unpacking and repackaging,
quality control checks and temporary quarantine storage for goods awaiting clearance
by quality control
2. Inspection- Quality and quantity check of the incoming goods for their required
Characteristics
3. Repackaging- Incoming lot may be having non-standard packaging which may not
be stored as it is in the respective location. In those cases these materials have to be
pre packed in unit loads/pallet loads suitable for storage.
4. Put away – Binning and storing the goods in their respective locations including the
temp locations from the receiving docking area.
5. Storage – Binning the approved material in their respective locations.
6. Order-Order picking / selection –Goods are selected from order picking stock in
the required quantities and at the required time to meet customer orders. Picking
often involves break bulk operations, when goods are received from suppliers in, say,
whole pallet quantities, but ordered by customers in less than pallet quantity .order
picking is important for achieving high levels of customer service; it traditionally also
takes a high proportion of the total warehouse staff complement and is expensive.
The good design and management of picking systems and operations are consequently
vital to effective warehouse performance
7. Sortation – This enable goods coming into a warehouse to be sorted into specific
customer orders immediately on arrival. The goods then go directly to order collation.
8. Packing and shipping – Picked goods as per the customer order are consolidated
and packed according to customer order requirement. It is shipped according to
customer orders and respective destinations.
9. Cross-docking –Move products directly from receiving to the shipping dock – these
products are not at all stored in the specific locations.

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10. Replenishing – This is the movement of goods in larger order quantities, for
example a whole pallet at a time , from reserve storage to order picking, to ensure
that order picking locations do not become empty. Maintaining stock availability for
order picking is important for achieving high levels of order fill.

Types of Warehouses
After getting an idea about the need for warehousing, let us identify the different
types of warehouses. In order to meet their requirement various types of warehouses
came into existence, which may be classified as follows.
i. Private Warehouses
ii. Public Warehouses
iii. Government Warehouses
iv. Bonded Warehouses
v. Co-operative Warehouses
i. Private Warehouses - The warehouses which are owned and managed by the
manufacturers or traders to store, exclusively, their own stock of goods are known as
private warehouses. Generally these warehouses are constructed by the farmers near
their fields, by wholesalers and retailers near their business centres and by
manufacturers near their factories. The design and the facilities provided therein are
according to the nature of products to be stored.
ii. Public Warehouses - The warehouses which are run to store goods of the general
public are known as public warehouses. Any one can store his goods in these
warehouses on payment of rent. An individual, a partnership firm or a company may
own these warehouses. To start such warehouses a license from the government is
required. The government also regulates the functions and operations of these
warehouses. Mostly these warehouses are used by manufacturers, wholesalers,
exporters, importers, government agencies, etc.
iii. Government Warehouses -These warehouses are owned, managed and controlled
by central or state governments or public corporations or local authorities. Both
government and private enterprises may use these warehouses to store their goods.
WAREHOUSING & INVENTORY MANAGEMENT
iv. Bonded Warehouses - These warehouses are owned, managed and controlled by
government as well as private agencies. Private bonded warehouses have to obtain
license from the government. Bonded warehouses are used to store imported goods
for which import duty is yet to be paid. Incase of imported goods the importers are
not allowed to take away the goods from the ports till such duty is paid. These
warehouses are generally owned by dock authorities and found near the ports.

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v. Co-operative Warehouses - These warehouses are owned, managed and controlled
by co-operative societies. They provide warehousing facilities at the most economical
rates to the members of their society.
Private and public warehousing
A warehouse may be privately owned and operated by a company making its own
merchandise. This is called a private warehouse. A warehouse may be owned and
operated by another organization, including a government agency, and only used by a
company on certain terms and conditions. This is called a public warehouse. A public
warehouse may be owned by a company in the private sector but used by the general
public. Irrespective of whether a warehouse is a private or a public warehouse, the
following factors have to be taken into account to work out the cost of storage.
1. Interest on the capital used for buying the site.
2. Interest on the funds used to buy the furniture
3. Cost of repairs and maintenance
4. Depreciation on building and equipment
5. InsuranceAREHOUSING & INVENTORY MANAGEMENT
6. If productivity (or efficient use) of the warehouse can be increased by 25 percent,
there is an equivalent reduction in costs per unit handled and processed.
7. There are fixed costs in the shape of the cost of space per square meter or per
cubic meter, etc.,
8. There are variable costs in the shape of cost per unit handled or processed, which
must be added to the fixed costs.

Maximum efficiency is achieved by processing a larger number of units through the

warehouse space. The larger the number of processed units the lesser the cost per
unit.
There are a few considerations which must be taken into account in the use of public
and or private warehousing facilities. There are advantages and disadvantages on
both, and the decision on establishing a private warehouse must only be made after a
careful assessment of overall benefits.

Private warehousing
The construction and maintenance of private warehousing facilities can be extremely
costly. All the expenses have to be carefully analyzed and evaluated.
These are
1. Fixed expenses incurred on the acquisition of land and building, normally which are
very high
2. Expenses, incurred on ensuring that warehouses are properly equipped with
Motorized Handling Equipment (MHEs) like fork lifts, conveyors, semi-automatic
trucks, storage racks and bins, and mezzanine floors, etc.,

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3. The cost of wages for staff required for peak activity periods like over time, which
can be very high since retrenchment during slack periods may not be possible.
4. Extra payment like over time wage to be made for work on Saturdays, Sundays, and
holidays.
5. Other service charges which are required in the maintenance of warehouse
operations have to be taken into account.
6. Budgets have to be allocated for office and record keeping equipments for
successful warehouse operations.
7. The cost of regular maintenance and repairs and the cost of such items as fire
extinguishers, fuel, air-conditioning, power and light have to be taken into account.
8. The cost of maintaining insurance records of premiums paid for fire, theft, and also
for workmen’s compensation.

Public warehousing
All the forgoing cost factors operate in public warehousing as well. But, in public
warehousing, the expenses are distributed over several consignments of their clients.
In most cases, therefore, the net result is a lower cost for each consignment.
Warehousing has become a extremely specialized service and a public warehousemen
can provide improved service with greater flexibility for the end user. A company
running a private warehouse will have to evaluate the costs incurred with the total
figure for the complete service through public warehousing.

Advantages of public warehousing

Some of the advantages of public warehousing are:
1. It is in general less expensive and more efficient and effective to achieve more
customer service level.
2. Public warehouses are usually strategically positioned and easily available.
3. Public warehousing is adequately flexible to meet most space requirements, for
several plans are available to suit the requirements of different users.
4. Fixed costs of a warehouse are distributed among many users. Therefore, the
overall cost of warehousing per unit works out to a lower figure.
5. Public warehousing facilities can be given up as soon as necessary without any
additional liability on the part of the user.
6. The costs of public warehousing can be easily and exactly ascertained, and the user
pays only for the space and services he uses.
7. Conservation of capital is more in public warehousing
8. It has got enough space to handle peak requirements.
9. Public warehousing has reduced risk in their operations.
10. Public warehousing has got good economies of scale
11. It would give Tax advantages for end users.
12. Knowledge of exact storage and handling costs are available to end users.
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13. It is insulated from labor disputes.

Disadvantages of public warehousing

1. Problems in communication due to system incompatibility
2. Specialized services may not always be available whenever it is needed.
3. Adequate space may not always be available for end users.

Advantages of private warehousing

The advantages of private warehousing are:
1. Private warehousing offers better monitoring systems over the handling and storage
of products as required by the management from time to time which would enhance
the performance of the warehouse.
2. There is less likelihood or error in the case of private warehousing since the
company’s products are handled by its own employees who are able to identify the
products of their own company.
3. If there is sufficient volume of goods to be warehoused, the cost of private
warehousing comparatively less than that of public warehousing. The cost of private
warehousing per unit may be actually higher if the private warehouse is packed to the
brim.
4. Private warehousing is the best choice for some of the locations and the products
handled because of the non-availability of the public warehousing.
5. Private warehousing has the opportunity to specially design its facilities for
automatic material handling equipment where as public warehousing may have the
same.
6. Enabling the end user to increase their efficiency by means of better design and
structured lay-out.
7. efficient use of human resources in warehouse operation improves end users’
overall performance
8. Intangible benefits in the form of cost reduction in all the warehouse operations.

Disadvantages of private warehousing

1. Lack of Corporate flexibility which increases the complexity in the operation.

2. Financial issues
3. Low rate of return.
4. Tax issues are complicated.

The following considerations determine the location of a warehouse:

1. Market service area and cost of distribution from the warehouse to the market
service area.

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2. Satisfaction of transport requirements and facilities available in the form of rail,
link roads and road vehicles.
3. Transportation rates prevailing in the area and distribution costs per unit.
4. Competition by rival companies and whether they have warehouse in the same
area.
5. Availability of power, water, gas sewage disposal and their cost.
6. Labour supply and labour costs in the area.
7. Industrial relations climate and labour productivity.
8. Pricing arrangements and the level of service desired to be rendered in terms of
availability of the product to the customer
9. Individual company requirements and constraints.
10. Real estate, excise and government taxes assessed in the area.
11. Attitudes of local residents and government towards establishment of the
warehouse.
12. Restrictions associated with warehouses.
13. Potential for later expansion.
14. Cost of land for the warehouse and other costs.
15. Possibility of change in the use of the facility at a later date if the company so
desires, and lease or sale of the land and buildings.

Characteristics of Ideal Warehouses:

I. Warehouse should be located at a convenient place near highways, railway stations,
airports and seaports where goods can be loaded and unloaded easily.
II. Mechanical appliances should be there to loading and unloading the goods. This
reduces the wastages in handling and also minimises handling costs.
III. Adequate space should be available inside the building to keep the goods in proper
order.
IV. Ware houses meant for preservation of perishable items like fruits, vegetables,
eggs and butter etc. should have cold storage facilities.
V. Proper arrangement should be there to protect the goods from sunlight, rain, wind,
dust, moisture and pests.
VI. Sufficient parking space should be there inside the premises to facilitate easy and
quick loading and unloading of goods.
VII. Round the clock security arrangement should be there to avoid theft of goods.
VIII. The building should be fitted with latest fire-fighting equipments to avoid loss of
goods due to fire.

ASSIGNMENT: SUBMISSION DATE 4TH MAY 2017

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a) Discuss the key processes within the supply chain. (10 mks)

b) Explain the advantages of inventory planning and control. (10 mks)

c) Discuss the main activities involved in logistics (10 mks)

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